Article Highlights:
- Charitable Deduction AGI Limitations
- Donations of Unused Employer Time Off
- Contributions of Appreciated Assets
- IRA to Charity Contributions
- Non-cash Contributions
- Avoiding Fraudulent Charities
There are some unique ways to make charitable contributions that can provide tax advantages to the donor. Before deciding about your charitable giving for the year, you may benefit from this article on ways to contribute that will help you tax-wise.
Normally, deductible charitable contributions are limited by a percentage of your income, more specifically your adjusted gross income (AGI), which is the number on your tax return before your deductions are subtracted. For most charitable contributions the tax deduction limit is 50% of your AGI (increased to 60% for cash contributions made to public charities in 2018 through 2025), but it can drop to 30% or even 20% in certain situations. Additionally, charitable contributions are only allowed if you itemize your deductions, which most people will do only when their standard deduction is less than the total of their overall itemized deductions.
Here are some of the unique ways of charitable giving that provide tax benefits to the donor:
Donate Unused Employee Time Off
As they have done before in the wake of disasters, including Hurricane Katrina, Superstorm Sandy, COVD-19, and Ukrainian relief, the Internal Revenue Service is allowing special contributions for Maui wildfire relief. It permits employees to donate their unused paid vacation, sick leave, and personal leave time to charities that are providing relief to victims of the Maui wildfire that began August 8, 2023.
It is referred to as leave-based donations and here is how it works: if your employer is participating, you can relinquish any unused and paid vacation time, sick leave, and personal leave for cash payments which your employer will donate to relief charitable organizations. The cash payment will not be treated as wages to you and your employer can deduct the amount donated as a charitable contribution or a business expense.
However, since the income isn't taxable to you, you will not be allowed to claim the donation as a charitable deduction on your tax return. Even so, excluding income is often worth more as tax savings than a potential tax deduction, especially if you generally claim the standard deduction or you are subject to AGI-based limitations.
This special relief applies to all donations made before January 1, 2025, giving individuals time yet in 2024 to forgo their unused paid vacation, sick and leave time and have the cash value donated to help those who lost everything, including their homes, livelihood and even family in this devastating disaster.
This is a great opportunity to provide sorely needed help in the aftermath of the wildfire without costing you anything but time. Contact your employer to see if they are participating, and if not, make them aware of the unique opportunity. They benefit by not having to pay payroll taxes on the cash equivalent of the donated time, so it is worth their time to participate. If your employer is unaware of his program refer them to IRS Notice 2023-69 for further details.
Contributions of Appreciated Assets
Although this is not a new strategy, it may be one you aren't aware of. Taxpayers can donate appreciated long-term capital gain assets to a charity and deduct the fair market value (FMV) of the assets as a charitable deduction. For example, suppose you donate to your church's building fund a stock that is worth $10,000 but that only cost you $2,000. Your charitable contribution would be $10,000, and you do not have to pay tax on the $8,000 appreciation in the stock. This strategy can also apply to land, homes, rentals, equipment, etc. Determining the FMV for listed stock is easy since the value of the stock can be determined from quoted stock prices on the day of the contribution. For other capital assets, a certified appraisal is generally required. It would be good practice to contact this office before making a gift of appreciated property to make sure that it is appropriate for your tax bracket and that the appraisal is properly performed and documented.
IRA to Charity Contributions
This charitable contribution, termed a qualified charitable distribution (QCD), is limited to taxpayers aged 70½ and older. They can directly transfer up to $100,000 a year from their IRA to a qualified charity. So if you are 70½ or older and make an IRA-to-charity transfer you won't get a charity deduction, but instead and even better, you will not have to pay taxes on the distribution, and because your AGI will be lower, you can benefit from other tax provisions that are pegged to AGI, such as the amount of Social Security income that's taxable and the cost of Medicare B insurance premiums for higher-income taxpayers. As an additional bonus, if you are required to take an annual required minimum distribution from your IRA, the transfer also counts toward your RMD.
Caveat
Beginning in 2020 Congress repealed the age limit for making IRA contributions. Which means a taxpayer can make traditional IRA contributions (if they have earned income) and QCDs after reaching age 70½. As a result, Congress included a provision in the tax law requiring a taxpayer who qualifies to make a QCD to reduce the QCD non-taxable portion by any traditional IRA contribution made after reaching 70½ that was deducted, even if they are not in the same year.
Charity Volunteer Deductions
If you do volunteer work for a charity, you cannot claim a charitable contribution deduction for the time you spend performing qualified charitable services. However, you can deduct out-of-pocket expenses you incur in performing those services. Here are some examples:
- Entertaining For Charity - You may deduct the cost of entertaining others on behalf of a charity (e.g., wining and dining potential large contributors), but the cost of your own entertainment (or meal) is not deductible. The meals or entertainment on behalf of a charity may be provided in your home.
- Uniforms - The cost of uniforms required to be worn when providing services to a charity are deductible as long as the uniforms have no general utility. The cost of cleaning the uniform also may be deducted. Treat these out-of-pocket expenses as "cash" donations rather than "property" donations.
- Charitable Away-From-Home Travel - Volunteers often pay their own way when they travel away from home overnight in connection with charitable work. If you travel away from home overnight, including to foreign locations, to do charitable work for a qualified organization, you may generally deduct the same types of expenses that may be claimed by a taxpayer who makes a similar trip for business purposes. These out-of-pocket costs are deductible if they are properly substantiated non-lobbying expenses, they are reasonable in amount, and there is no significant element of personal pleasure, recreation, or vacation in the travel. Deductible expenses include your out-of-pocket roundtrip travel cost, taxi fares and other costs of transportation between the airport or station and the hotel, lodging and meals.
Meals - If you are a volunteer traveling away from home overnight for a charity-related purpose, you may deduct 100% of your meal costs, since charity meals are not subject to the 50% reduction that applies to business meals.
Non-cash Contributions
This is a type of contribution with which you can easily run afoul of the IRS because the contribution deduction is based on the fair market value of the item being contributed, not the item's original cost, and most used items such as clothing and household goods depreciate substantially.
Do not include items of de minims value, such as undergarments and socks, in the deductible amount of your contribution, as they are specifically not allowed. It is not uncommon to see taxpayers over-valuate their contributions. That is why the IRS has four levels of verification and documentation requirements for non-cash contributions, with each becoming more stringent as the valuation increases:
Caution: The value of similar items of property that are donated in the same year must be combined when determining what level of documentation is needed. Similar items of property are items of the same generic category or type, such as clothing, household goods, coin collections, paintings, books, jewelry, privately traded stock, land and buildings.
Deductions of Less Than $250-You must obtain and keep a receipt from the charitable organization that shows:
1. The name of the charitable organization,
2. The date and location of the charitable contribution, and
3. A reasonably detailed description of the property.
Note: You are not required to have a receipt if it is impractical to get one (for example, if the property was left at a charity's unattended drop site). This exception only applies if all the non-cash contributions for the year are less than $250.
Deductions of At Least $250 But Not More Than $500- You must provide the same information as in the previous category and add:
4. Whether or not the qualified organization gave you any goods or services as a result of the contribution (other than certain token items and membership benefits).
If the deduction includes more than one contribution of $250 or more, you must have either a separate acknowledgment for each donation or a single acknowledgment that shows the total contribution.
Deductions Over $500 But Not Over $5,000-You must provide the same acknowledgement and written records that are required for the two previous categories plus:
5. Attach a completed IRS Form 8283 to the income tax return that reports:
a. How the property was obtained (for example, purchase, gift, bequest, inheritance, or exchange),
b. The approximate date the property was obtained or-if created, produced, or manufactured by the taxpayer-the approximate date when the property was substantially completed, and
c. The cost or other basis, and any adjustments to this basis, for property held for less than 12 months and (if available) the cost or other basis for property held for 12 months or more.
DeductionsOver$5,000-These donations require time-sensitive appraisals by a "qualified appraiser" in addition to other documentation (this requirement, however, does not apply to publicly traded securities). When contemplating such a donation, please call this office for further guidance about the documentation and forms that will be needed.
Unfortunately, legitimate charities face competition from fraudsters, so if you are thinking about giving to a charity with which you are not familiar, do your research so that you can avoid swindlers who are trying to take advantage of your generosity. They show up in droves after disasters like hurricanes and firestorms. Here are tips to help make sure that your charitable contributions go to the cause that you support:
- Donate to charities that you know and trust. Be alert for charities that seem to have sprung up overnight in connection with current events.
- Ask if a caller is a paid fundraiser, who he/she works for, and what percentages of your donation go to the charity and to the fundraiser. If you don't get clear answers-or if you don't like the answers you get-consider donating to a different organization.
- Don't give out personal or financial information-such as your credit card or bank account number-unless you know for sure that the charity is reputable.
- Never send cash. You can't be sure that the organization will receive your donation, and you won't have a record for tax purposes.
- Never wire money to someone who claims to be from a charity. Scammers often request donations to be wired because wiring money is like sending cash: Once you send it, you can't get it back.
- If a donation request comes from a charity that claims to help a local community group (for example, police or firefighters), ask members of that group if they have heard of the charity and if it is actually providing financial support.
- Don't make a contribution if it is solicited in an email claiming to be from the IRS. The IRS does not send emails to individuals and does not ask for donations to organizations related to natural disasters. Scammers use this ploy to extract money from taxpayers who think their contributions will go for hurricane relief or to wildfire victims.
- Check out the charity's reputation using the Better Business Bureau's Give.org orCharity Watch.
Remember that if you want to deduct a charitable contribution on your tax return, the donation must be to a legitimate charity. Contributions may only be deducted if they are to religious, charitable, scientific, educational, literary or other institutions that are incorporated or recognized as organizations by the IRS. Sometimes, these organizations are referred to as 501(c)(3) organizations (after the code section that allows them to be tax-exempt). Gifts to federal, state or local government, qualifying veterans' or fraternal organizations, and certain nonprofit cemetery companies also may be deductible. Gifts to other kinds of nonprofits, such as business leagues, social clubs and homeowner's associations, as well as gifts to individuals, cannot be deducted.
Be aware that, to claim a charitable contribution, you must also itemize your deductions. If you only marginally itemize your deductions, it may be beneficial for you to group your deductions in a single year and then to skip deductions in the next year.
Please contact this office if you have questions related to the tax benefits associated with charitable giving for your particular tax situation.
